Orchard Therapeutics (NASDAQ:ORTX) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Orchard Therapeutics plc (NASDAQ:ORTX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Orchard Therapeutics

What Is Orchard Therapeutics's Net Debt?

As you can see below, Orchard Therapeutics had US$25.2m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$298.4m in cash, so it actually has US$273.3m net cash.

How Healthy Is Orchard Therapeutics' Balance Sheet?

According to the last reported balance sheet, Orchard Therapeutics had liabilities of US$48.5m due within 12 months, and liabilities of US$45.0m due beyond 12 months. Offsetting this, it had US$298.4m in cash and US$20.4m in receivables that were due within 12 months. So it actually has US$225.3m more liquid assets than total liabilities.

This luscious liquidity implies that Orchard Therapeutics' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Orchard Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Orchard Therapeutics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Orchard Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 3.3%, to US$2.6m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Orchard Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Orchard Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$117m and booked a US$137m accounting loss. However, it has net cash of US$273.3m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Orchard Therapeutics that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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